IME: Subsidies and Tax Reliefs Damage Bulgarian Agriculture

During the period 2001-2007 the share of the agricultural sector in the GDP decreased more than two times, even though the Bulgarian economy was growing rapidly. This development is in contrast with the state assistance to the agricultural sector over the years, which have been growing continuously.

The assistance to the agricultural producers during the period 2001 – 2007 is mainly in tax relief and subsidies and the total amount is over 2.5 billion levs.

Diagram: Share of the agricultural sector in GDP and state assistance

Source: Agrarian reports of the MAF, Budgetary reports of MF

During the period 2001-2007 the agricultural producers have used tax relief to the amount of 779 million levs (no tax is levied on the personal income, profit tax – 60% ceded and the excise tax on the purchased fuel is refunded.

Besides the tax relief, during the period 2001-2007, the agricultural producers received a total of 1.75 billion levs in subsidies and these funds have been highly concentrated. Examining the data about the direct payments (under CAP) for the year 2007 it becomes clear that 80% of the subsidies have been given to less than 7% of farmers (or 5,000 beneficiaries), while the remaining almost 70,000 beneficiaries have received less than 20% of the total funds.

The analysis indicates that the subsidies and tax reliefs are not a social measure, which is assisting the agricultural producers, since in reality they are highly concentrated to the large farms and companies.

Diagram: Distribution of the subsidies from SF "Agriculture" among the agricultural producers during 2007

Source: IME on the basis of data from SF "Agriculture"

The study shows that, in spite of the enormous aid, most of the farmers declare very low incomes – for 2007 over 67% of the farmers declare up to 60 levs monthly income, while only 2% (or 651) of them declare income of over 500 levs per month.

The continuous interventions in the agricultural sector do not produce the desired results. The driving force in each sector are the people, which following their own interest, are inclined to take the risks and invest and respectively to develop their business. The behavior of these people is determined by the stimuli, which in the case of agriculture are strongly biased.

"The focus of the agricultural producers is not any longer on the customers (consumers), but on the government. The stimuli are not any longer to create wealth, but to redistribute as much as possible in someone's favor" – said Mr. Petar Ganev, economist at IME.

In reality, the subsidies are enslaving the people in an ineffective activity. The people working in the agricultural sector are more than those getting subsidies. Some of them in time would leave the sector, since it must become more effective. The existence of subsidies is holding back producer which are not effective and would delay this process at the price of millions of levs and would postpone the reformation of the sector, which strongly needs it.

The analysis of the assistance to the agricultural sector in Bulgaria leads to the following conclusions:

• The state assistance in the form of tax relief and subsidies increased almost four times.
• The agricultural sector is not developing and is pulling the entire economy backwards
• The focus of the agricultural producers is shifting from the consumers to the state.
• The stimuli created are biased and harmful for every one – producers, consumers, third parties and the state.

This is imposing the requirement to execute reforms in the agriculture.

The Bulgarian agriculture needs changes which would make it such that the farmers would make their own decisions freely (about production, pricing, etc.) of the basis of the market factors, their income should depend entirely from their customers, and not the state and the taxpayers respectively.

Based on the economic logic and the good international practices (New Zeeland, Australia, Sweden – presented in the study) we recommend the following measures to improve the agricultural sector:

• Abolish all tax reliefs – the rates for the direct taxes are among the lowest in Europe and hence it is necessary immediately to abolish any tax reliefs.
• Abolish the subsidies from the state budget – the assistance form the EU would reach its peak (by its own) during the next few years.
• Improving the business conditions – should encourage entrepreneurship and effectiveness in all sectors.
• Abolish the interventions on the market – the government interventions are more obstacle for every one then a solution of the problems of some.
• Reduction of bureaucracy.
• In mid-term plan abolish all subsidies – the handing out of subsidies has a negative effect on the people, the state budget and the farmers themselves through unrealistic prices, biased stimuli and reduced productivity.

The analysis is available here! (BG)

The analysis is available here! (ENG)